Kenya to maintain its position as an international transit hub with multi-modal developments

Transport and logistics are at the core of Kenya’s economic narrative due to the country’s role as a trans-shipment hub for goods moving to landlocked countries in East and Central Africa. The Port of Mombasa (PoM) is located on international container routes, serving as a well-integrated landing port for regional shipping networks, while land connectivity has also become a major focus, with a number of large-scale projects undertaken to link regional countries with the global market. Railroads are being built and extended, new ports are being constructed and connections from the coast to the capital have been completely transformed in recent years.

However, the sector does have its share of issues. Overhauling the infrastructure network and improving links to more remote areas of the country will take time, particularly as only 44,100 km of the country’s 177,800 km of roadways are considered in good condition, according to the Kenya National Highways Authority (KeNHA). The biggest problem, though, is the cost of upgrading transportation infrastructure. Efforts made so far have been a factor in the country’s rising debt, and it is not clear whether the tolls and fees charged will be able to cover the expenses.

Performance

The transportation and storage sector remains a key driver of GDP. In 2017 the industry grew by 7.4%, from KSh296.1bn ($2.9bn) in 2016 to KSh317.9bn ($31.bn), contributing 7.3% to GDP, according to the Kenya National Bureau of Statistics (KNBS). Of this, the land transport segment made up the lion’s share, comprising nearly 63% of the total and contributing KSh199.8bn ($2bn), or 5.1%, to GDP. Data from the KNBS at the end of June 2018 showed that the transport and storage sector was continuing to expand, adding KSh160.5bn ($1.6bn) to GDP, representing a year-on-year (y-o-y) increase of around 7.5%.

In terms of global rankings, Kenya placed 68th out of 160 countries on the World Bank’s Logistics Performance Index 2018, which ranks global transport and logistics challenges and opportunities every two years. This marked a decline of 21 places on 2016, but an improvement from 74th place in 2014. On a regional level, Kenya places ahead of neighbours Cameroon (95th), Malawi (97th), Uganda (102nd) and Somalia (144th), and behind only Rwanda (57th).

Budget

Some KSh207.3bn ($2bn) was allocated to transport infrastructure in the KSh2.6trn ($25.5bn) 2018/19 Budget Statement, tabled to Parliament in June by Henry Rotich, Cabinet secretary for the National Treasury, with road, rail, maritime and aviation projects all receiving significant funding. Of the sector’s allocation, KSh115.9bn ($1.1bn) has been made available for ongoing road projects, up from KSh63.6bn ($623m) the previous financial year. Phase two of the national Standard-Gauge Railway (SGR) project will receive KSh74.7bn ($731.9m) in funding – building on phase one of the network, which began freight services in January 2018 – while KSh8.9bn ($87.2m) will be set aside for the Lamu Port-Southern Sudan-Ethiopia Transport (LAPSSET) corridor, a $24.5bn project designed to provide road, rail and pipeline links to countries throughout the region. Another KSh2.7bn ($26.5m) was allocated to the Mombasa Port Development Project, KSh1.4bn ($13.7m) for the expansion of a series of airports and runways, and additional funds set aside for emergency repairs to roads damaged by flooding at the beginning of 2018.

On the Road Again

Road financing comes in part from the Roads Maintenance Levy Fund – a KSh18 ($0.18) per litre charge on consumer fuels – but this alone has not been enough to raise needed cash. To undertake current large-scale road projects, the government is looking at business models to increase private sector participation, as well as global donors.

Two road projects expected to begin by the end of 2018 – the Ngong-Kiserian-Isinya and Kajiado-Imaroro connections – have been finalised as annuity deals under the country’s Public-Private Partnership (PPP) Programme, whereby banks provide funds in the form of up-front loans to contractors, and the Treasury reimburses the lender over a period of time.

Meanwhile, construction on a new road from Jomo Kenyatta International Airport (JKIA) to the Nairobi-Nakuru Highway at Rironi is expected to commence in early 2019, David Muchilwa, development director at the KeNHA, told local media in February 2018. The road will be completed in three phases with the help of global donors. The African Development Bank committed to funding the first phase, which will connect JKIA to Likoni Road via a 6.5-km road at a cost of KSh8bn ($78.4m). While the World Bank will finance the second and third phases, running 12 km from Likoni Road to James Gichuru Road and then 25 km to Rironi, at a total cost of KSh31bn ($303.7m).

Other projects include the Dongo-Kundu bypass, also known as the Mombasa Southern Bypass. The first phase of the project, running 10 km from the Miritini Interchange to Kipevu, was completed in June 2018. The second phase, from Mwache Junction to Mteza, will begin in October 2018, while the final phase will take the bypass out to the Mombasa-to-Nairobi expressway at Bonje. The funding for all three phases was estimated at KSh40bn ($391.9m) and is being provided by the Japanese International Cooperation.

Northern Corridor

In late 2017 the country started overhauling 657 km of East Africa’s Northern Corridor, which links the PoM with a market of 260m people in Uganda, Rwanda, Burundi and parts of the Democratic Republic of the Congo (DRC). The work is taking place in two phases: the first will involve the rehabilitation and expansion of the A109, which runs 480 km from Mombasa to Nairobi, and the second concerns the A104, extending 174 km from Nairobi to Nakuru and Mau Summit. Early 2018 saw the Third Engineering Bureau of China City Construction Group awarded contracts for the 41.7-km Mombasa-Mariakani section of the Mombasa-to-Nairobi Expressway, while the contract for the 21-km Athi River-Machakos section was given to the China Railway 21st Bureau Group. This built on the decision in August 2017 to award US engineering company Bechtel rights to construct and operate sections of the expressway.

Total investment for the project, which will follow the SGR, is set at KSh380bn ($3.7bn) and will involve 48 km of interchanges, 76 overpasses, 21 underpasses and 189 km of local roads. While funding negotiations are ongoing – Bechtel is working with the government to undertake an engineering-procurement-construction-with-financing model – work on the motorway is expected to start before the end of 2018.

Bumps in the Road

Road building has been a problematic endeavour in the country for years. Despite support coming from the World Bank, May 2017 saw the cancellation of the Roads Annuity Fund, which the Treasury would use to reimburse private contractors for designing, building and maintaining the public roads. The government had hoped to use the model to build 10,000 km of medium-grade roads across the country; however, inflated costs and delays in project approvals saw support for the initiative dwindle. With the ending of the road annuities, money for construction now comes directly from the national budget.

Adding to this, overcrowding and the poor condition of the roads in Nairobi has led to congestion, with some commuters spending up to six hours per day in traffic, according to local media reports. To remedy this situation, the Kenya Roads Board (KRB) has proposed that 25% of the national funds allocated for urban roads be committed to the capital city, which is home to 40% of the country’s population and 80% of its total road traffic. The money would go first to the KRB, then to the Ministry of Transport (MoT) and finally to the local authorities. The board would also like to be able to legally hold back funds from local governments that fail to implement proper road standards. While the KRB maintains the right to withhold money, this is not yet legally enshrined, which allows local governments to dispute the decision.

The high price of building roads in Kenya compared with regional peers is also an issue. The cost of building the Mombasa-to-Nairobi Expressway, for example, has been estimated at KSh900m ($8.8m) per km. To compare, according to the World Bank, the average per-kilometre cost of large-scale road infrastructure projects in the DRC and Ethiopia were estimated at KSh34m ($333,120) and KSh83m ($813,200), respectively. In 2013 the cost of laying one kilometre of tarmac in Kenya was KSh83m ($813,200); by 2018 this price had risen to KSh181m ($1.8m).

These expenses continue to affect key infrastructure projects. Construction on the 31-km Northern Bypass four-lane highway connecting key neighbourhoods around Nairobi, for example, will be delayed until the government raises the KSh30bn ($293.9m) needed for the project. “There is a lot of traffic, but questions remain as to who is going to pay the bill,” Mads Skov-Hansen, managing director at Danish global container division Maersk Line, told OBG. “Road projects come with a hefty price tag, and right now the big problem is how to get the investments to pay. They need revenue to pay the loans.”

Rail Networks

One of the biggest developments in transportation in recent years has been the completion of the first phase of the SGR. The 480-km route from Mombasa to Nairobi was built by the China Road and Bridge Corporation (CRBC) at a cost of $3.2bn. The passenger service was inaugurated in May 2017, while the freight service began on January 1, 2018, with the first cargo arriving in Nairobi that same day. In addition to reducing the journey between the coast and the capital from 12 hours to four, the cost of domestic cargo shipment is expected to fall from $0.20 per tonne per km to $0.08, while shipments to Uganda were estimated to drop by 35%.

The SGR serves as an artery of the Northern Corridor and is expected to bring economic development into previously underserved areas in Kenya, with James Macharia, the cabinet secretary for the Ministry of Transport, estimating that the first phase of the SGR project will increase Kenya’s GDP by 1.5%. Peter Kagwanja, founding president and chief executive of the Nairobi-based pan-African think-tank Africa Policy Institute, told media in September 2018 that Kenya stands a higher chance of becoming a continental economic powerhouse thanks to the launch of the SGR train. Indeed, Kenya Railways, the current operator, would like the percentage of cargo carried by rail to increase from 5% as of 2018 to 40% by 2025.

As with major road projects, however, the financial outlay associated with rail developments is turning heads. The Addis Ababa-Djibouti line, which launched in 2016, was carried out for $3.4bn, runs 250 km further than the SGR and is electrified. Trains running on the SGR line currently employ less expensive diesel-powered engines. The price of laying the SGR’s track alone came to $5.6m per km – almost triple the industry standard. This has led stakeholders to question the profitability of the SGR, which incurred a KSh10bn ($98m) loss in its first year of operation, according to an MoT statement in June 2018.

Key to the viability of the project will be the extension of the line to Uganda. Kenya has already started on the track from Nairobi to the border town of Malaba, and funding was approved for the Kisuma-Malaba-Kampala link in June 2018. However, Kenya has asked China to recast half of the cost of the rail line as a grant, with the rest remaining a loan. While Uganda is currently in the land negotiation stage, concerns have arisen regarding the ability of the Ugandan side to prepare itself for the rail line entering its territory.

Despite issues, the government shows no sign of halting development. The Kenya Electricity Transmission Company will be adding an electric train line to the SGR, connected to the 400-KV Mombasa-Nairobi Transmission Line. Contracts worth $240m were signed in February 2018 with the China Electric Power Equipment and Technology Company to construct 14 substations over a period of 28 months.

Maritime

The current focal point of Kenya’s maritime sector is the PoM. As the largest port in East Africa, more than 200m people depend on the goods and products unloaded here, making the road from Mombasa to Nairobi one of the continent’s most crucial economic corridors. Capacity at the facility was boosted from 1.08m twenty-foot equivalent units (TEUs) to almost 1.7m TEUs with the completion of the first phase of the three-part Mombasa Port Development Project in early 2016. This contributed to increases in cumulative container traffic, which grew by 5.3% y-o-y in the first half of 2018, to 614,625 units. Imports made up 83.6% of container traffic, followed by exports (12.5%) and trans-shipment (3.6%).

The second phase of the Mombasa Port Development Project commenced in mid-2018. This stage in the project will see enlargements made at the PoM’s second container terminal. In April 2018 the government signed a KSh35bn ($342.9m) contract with Japan’s Toyo Construction Company to bring total port capacity to 21m TEUs over a 38-month period.

Kenya has also seen a return of cruise tourism to its coastline, with 2717 passengers arriving in 2016 and 4747 in 2017. This form of tourism had been dormant in recent years due to piracy off the Horn of Africa, but with those risks having abated, the country is hoping to return to previous levels. In 2004, for example, 42 cruise ships brought approximately 15,000 visitors.

In general, work is being done to improve the operation of ports in the country. Cargo entering Kenya may be able to clear more quickly with an amendment to the East African Community Customs Management Act, which was written in 2004 to make provisions for the management and administration of Customs matters. The act will permit the Kenya Revenue Authority (KRA) to profile shipments before they arrive at dock, allowing for direct loading and seamless movement onshore or inland. At present, it can take up to one month for containers to clear Customs in Kenya. The KRA hopes to bring this down to six hours in the future.

Lamu Port

The government has also prioritised investment in Lamu Port, located 242 km to the north of Mombasa, with a constant stream of capacity upgrades and improvements since 2012. A major component of Vision 2030, the country’s development programme launched in 2008, the LAPSSET project involves the construction of road networks, a railway, three airports, a crude oil pipeline and fibre-optic cables connecting four countries. The comprehensive strategy will join deep-sea ports with land connections in order to give South Sudan and Ethiopia efficient and cost-effective links to global markets. Three of the 32 planned deep-sea berths at Lamu Port are expected to be completed by the end of 2018. The berths are being constructed by the CRBC with $689m of state funding. Financing for the remaining 29 berths is expected to be provided by the private sector.

The infrastructure being built as part of the LAPSSET corridor will also comprise a section of the Trans-African Highway network, which will ultimately connect Cape Town, South Africa to Cairo, Egypt, benefitting a number of cities in between.

Air Links

The Kenya Airports Authority (KAA) oversees eight airports and two airstrips in the country. The largest facility is JKIA in Nairobi, which hosts more than 40 passenger carriers and 25 cargo transporters. Other key airports include Mombasa’s Moi International, which hosts 18 airlines connecting Kenya to Europe and to 20 regional cities; and Eldoret International Airport, in Kenya’s north-west.

Domestic passenger numbers at Kenyan airports declined slightly in 2017, from 4m in 2016 to 3.9m, while international arrivals and departures witnessed an increase of 6%, from 5.7m to 6.1m people over the same period. In terms of shipping, 2017 saw 290,772 tonnes of cargo handled in at Kenyan airports, a 17% increase on 2016. This helped contribute to sector earnings, which rose by around 14%, from KSh159.3bn ($1.6m) in 2016 to KSh183m ($1.8m) in 2017.

In an effort to reduce barriers to trade and boost greater connectivity, in early 2018 Kenya became one of 23 African Union countries to sign on to the Single African Air Transport Market (SAATM), a regional open skies treaty. The deal is set to make travel in Africa easier for Africans by reducing visa regulations and increasing the number of routes for African airlines so they can better contend with global competitors. Once implemented, the SAATM is expected to lower the cost of air transportation by 25% and add an estimated KSh8.1bn ($79.4m) per year to Kenya’s GDP.

However the sector is not without its problems. The MoT, the KAA and the Kenya Civil Aviation Authority (KCAA) are undertaking an investigation to determine whether local airlines are operating within the terms of their licences. In some cases, airlines with permits to carry passengers are actually carrying cargo. In early 2018 the KCAA suspended two airlines for carrying illegal shipments, mostly between Nairobi’s Wilson Airport and Somalia, while JKIA grounded five aeroplanes for violating cargo carriage rules.

Inspections by the International Civil Aviation Organisation (ICAO), which banned flights from Uganda for failing to comply with global safety standards, stoked concerns that Kenya could face similar ramifications if the situation was not addressed. However, Kenya’s airline sector passed the ICAO examination in July 2018, just ahead of the inauguration of Kenya Airways’ first direct flight from Nairobi to the US.

Outlook

While authorities need to address the high cost of large-scale infrastructure projects if it is to continue successfully procuring funding, developments currently under way mean Kenya is well situated to become a major transport hub in East Africa. The SGR, upgrades and capacity expansions at the MoB and Lamu Port, as well as supporting road infrastructure are likely to improve regional connectivity to global markets, boosting the GDP of the region as a whole. “This has been a year of change in the transport sector in East Africa,” Skov-Hansen told OBG. “This is especially true for Kenya, which is by far the most efficient country for doing business in the region.”